With China’s economy in a swoon, Biden sends a second Cabinet member to Beijing to soothe relations

(Originally published July 4 in “What in the World“) U.S. Treasury Secretary Janet Yellen, in defiance of the State Dept.’s latest warnings against travel to China, heads to China on Thursday for a long weekend that’s being advertised as a diplomatic mission to salvage relations between the world’s two largest economies.

China has begun retaliating against Washington’s efforts to block exports of sensitive semiconductor technology to China, as well as to shift corporate supply chains to friendlier countries, or “friendshoring.” Last month, Beijing banned chips from U.S. company Micron Technology from use in any equipment handling “sensitive” information. On Monday, Beijing said it would restrict exports of two metals used in making chips—gallium and germanium.

Yellen has publicly decried the friendshoring trend, noting that decoupling the two economies would damage both, even though the Biden Administration has kept Trump-era tariffs against China in place. That the White House has been sending such high-level peace feelers—first Blinken, now Yellen—to Beijing, however, is a step in the right direction and a signal of just how bad things must look. Even Republican hawks are keeping remarkably quiet despite Biden giving them ample latitude to carp that his Cabinet is kowtowing to Beijing.

With China’s economy looking increasingly precarious, however, Yellen’s real agenda may more likely be to hear what officials in Beijing are doing to keep China from slipping into either a Lehman-style financial crisis or, the more likely scenario, into a Japan-style economic coma that lasts for decades. Yellen’s chief concern will be that China doesn’t devalue the yuan in a last-ditch effort to boost export income.

Devaluing the yuan would potentially send China’s diplomatically sensitive trade surplus soaring. It could also complicate efforts by the U.S. Federal Reserve to normalize interest rates: lowering the price of Chinese imports would artificially lower inflationary pressures in the U.S., potentially prompting the Fed to halt interest-rate hikes too early, only to see inflation rebound once China let its currency recover.

But Beijing may be grasping for straws. In the latest sign of weakening growth, the official manufacturing purchasing managers’ index, or PMI, signaled a contraction in factory activity for the third straight month. The PMI for May was 49, slightly better than April’s 48.8 reading. But any number below 50 represents that things are slowing down. And China’s slowdown is radiating across Asia and the globe.